Supply chain management 5

Supply chain management
The supply chains strategic importance
Supply chain management is a hot topic in business today. The idea is to apply a total system approach to managing the entire flow of information, materials and services from raw material suppliers through factories and warehouse to the end customer. The term supply chain comes from a picture of how organizations are linked together as viewed from a particular company.

Supply chain management is the integration of the activities that procure materials and services transform them into intermediate goods and final products and deliver them to customers. These activities include purchasing and outsourcing activities plus many other functions that are important to the relationship with suppliers and distributors. Supply chain management includes determining 1) transportation vendors 2) credit and cash transfer 3) suppliers 4) distributors 5)account payable and receivable 6) warehousing and inventory 7)order fulfillment and 8) sharing customer forecasting and production information. The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer. Competition is no longer between companies it is between supply chains. And those supply chains are often global.
The following figure depicts a global supply chain for both manufacturing and service companies. Note the linkage between suppliers that provides inputs manufacturing and service support operations that transform the inputs into products and services and the distribution and local service providers that localize the product. Localization can involve just the delivery of the product or some more involved process that tailors the product or service to the needs of the local market.

As firms strive to increase their competitiveness via product customization high quality cost reductions and speed to market added emphasis is placed on the supply chain.

Effective supply chain management makes suppliers partners in the firms strategy to satisfy an ever changing marketplace. A competitive advantage may depend on a close long term strategic relation with a few suppliers.
To ensure that the supply chain supports the firms strategy managers need to consider the supply chain issues shown in the following table. Activities of supply chain managers cut across accounting finance marketing and the operations discipline. Just as the operations management function supports the firms overall strategy the supply chain must support the operations strategy. Strategies of low cost or rapid response demand different things from a supply chain than a strategy of differentiation. The following table shows how supply chain decisions affect strategy.

Table: how supply chain decisions affect strategy
                       Low cost strategy              Response strategy                     Differentiation strategy.
suppliers goal | supply demand at          | Respond quickly to                 |share market research jointly
                         lowest possible cost         changing requirements and     develop products and options
                                                                   demand to stock outs              (eg benetton)
Primary selection |  select primarily for  | select primarily for | select primarily for product development
criteria                                             cost    capacity speed and                        skills                                                                                                               flexibility   
Process               |Maintain high average | invest in excess capacity and flexible | use modular processes 
characteristics      utilization                        processes                                           that lend themselves to
                                                                                                                                 mass customization
inventory            | Minimize inventory throughout |Develop responsive system   | minimize inventory
characteristics    the chain to hold down costs          with buffer stocks positioned to | in the chain to 
                                                                                   ensure supply                       | avoid obsolescence
lead time          | shorten lead time as long as | invest aggressively to reduce  | Invest aggressively to 
characteristics   it does not increase costs        production lead time                 reduce development lead

Product design  | Maximize performance  | use product designs that           |Use modular design to 
characteristics      and minimize cost           lead to low setup time                postpone product 
                                                                      and rapid production ramp-up  differentiation for as long as

so why supply chain management such a popular topic these days? the answer is that  many companies are achieving significant competitive advantage by the way they configure and manage their supply chain operations. Dell computer for example skips the distribution and retail typical of a manufacturing company's supply chain. Dell takes orders for its computers from customers over the internet and manufactures directly to the orders. The customers are able to get the latest models at very competitive prices in only five or six days using this approach.
keep in mind that a good supply chain design for dell may not work for a company like campbell soup.
If campbell soup were to eliminate distribution centers from their supply chain the costs associated with transporting their products to grocery stores would be excessive. Imagine ordering cans of chicken noodle soup over the internet directly from the manufacturer. Its as interesting idea, but the cost to transport that individual can of soup is higher than the cost of the soup. The grocery store is needed as the intermediary so that the shipping cost can be reduced through truckload shipments.

Firms must achieve integration of strategy up and down the supply chain and must expect that strategy to be different for different product and to change as product move through their life cycle. Darden restaurants has mastered worldwide product and service complexity by segmenting its supply chain and at the same time integrating four unique supply chains into its overall strategy.


The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. If refers to increasing swings in inventory in response to shifts inn customer demand as you move further up the supply chain. The concept first appeared in jay forresters industrial dynamics (1961) and thus it is known as the Forrester effect, The bullwhip effect was named for the way the amplitude of a whip increases down its length. The further from the origination signal the greater the distortion if the wave pattern, In a similar manner forecast accuracy decrease as move upstream along the supply chain. For example many consumer goods have fairly consistent consumption  at retail. But this signal becomes more chaotic and unpredictable as you move away from consumer purchasing behavior.

Supply Chain Risk

In this age of increasing specialization, low communication cost and fast transportation, companies are making less and buying more. This means more reliance on supply chains and more risk. Managing the new integrated supply chain is a strategic challenge. Having fewer suppliers makes the supplier and customer more dependent on each other,increasing risk for both. This risk is compounded by globalization and logistical complexity. In any supply chain vendor reliability and quality may be challenging, but the new paradigm of a tight fast low inventory supply chain operating across political and cultural boundaries adds a new dimension to risk. As organizations go global shipping time may increase logistics may be less reliable and tariffs and quotes may block companies from doing business. In addition international supply chains complicate information flows and increase political and currency risks.
Thus, the development of a successful strategic plan for supply-chain management requires careful research an understanding of the risk involved and innovation planning.Reducing risk in this increasingly global environment suggests that management must be able to mitigate and react to disruptions in:
1. Processes( raw material and component availability quality and logistics.)
2. Controls ( management metrics and reliable secure communication for financial transactions product designs and logistics scheduling)
3. Environment (customs duties tariffs security screening natural disaster currency fluctuations  terrorist attacks and political issues)

lets look at how several organizations address these risks in their supply chains;
  • To reduce process risk, McDonalds planned its supply chain 6 years in advance of its opening in russia. Creating a $60 million food town, it developed independently owned supply plants in moscow to keep its transportation costs and handling times low and its quality and customer-service levels high. Every component in this food chain-meat plant chicken plant bakery fish plant, and lettuce plant is closely monitored to make sure that all the system's links are strong.
  • Fords  process risk reduction strategy is to develop a global network of few but exceptional suppliers who will provide the lowest cost  and highest quality, this has driven one divisions supplier base down to only 277 suppliers worldwide compared with 700 previously.
  • Darden restaurents has placed extensive controls including third party audits on supplier processes and logistics to ensure constant monitoring and reduction of risk.
  • Boeing is reducing control risk through its state of the art international communication system that transmits engineering scheduling and logistics data not only to boeing facilities but to the suppliers of the 75% to 80% of the 787 Dreamliner that is built by non-Boeing companies.
  • Hard Rock Cafe is reducing environmental (political) risk by franchising and licensing rather than owning when the political and cultural barriers seem significant.
  • Toyota after its experience with both fire and earthquakes has moved to reduce environmental(natural disaster) risk with a policy of having at least two suppliers for each component.

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